Top pension funds back on growth track

Total assets of the world’s largest 300 pension funds grew by almost 10 per cent in 2012, compared to around two per cent in 2011, to reach a new high of USD14.0trn, according to new research.

The P&I/Towers Watson global 300 research, conducted in conjunction with Pensions & Investments, shows that last year’s growth in assets was among the highest recorded in recent years; similar to 2010 (11 per cent) but not the exceptional growth of 14 per cent recorded in 2007.

By individual region, Asia-Pacific has had the highest five-year compound growth rate of seven per cent compared to Europe (six per cent) and North America (-1 per cent); while the Latin American and African regions combined have a growth rate for the same period of around 11 per cent, albeit from a low base. The research also shows that the world’s top 300 pension funds now represent over 47 per cent of global pension assets.

According to the research, defined benefit (DB) funds account for 69 per cent of total assets, down from 75 per cent five years ago. During 2012, DB assets grew by around eight per cent (one per cent in 2011) compared to around 12 per cent for defined contribution assets (DC) (six per cent in 2011), while reserve funds grew by almost 18 per cent (one per cent in 2011).

Carl Hess, global head of investment at Towers Watson, says: “The rise in pension assets in 2012 was a combination of investment market recovery and new cash commitments. There were many similarities to the year before – bumpy recovery accompanied by occasional hyper-volatility in markets - but with some notable differences which are cause for some encouragement for the first time in five years.”

According to the research, the US remains the country with the largest share of pension fund assets accounting for 35 per cent. Japan has the second-largest market share of around 15 per cent (17 per cent in 2011), largely because of the Government Pension Investment Fund. That fund, which is still at the top of the ranking (a position it has held for the past ten years), has assets of around USD1.3trn and maintains a conservative asset allocation. The Netherlands has the third-largest market share with seven per cent, while Canada and the UK are fourth and fifth largest respectively with over five per cent share each.

The research shows that 40 new funds entered the ranking during the past five years and, on a net basis, Australia and Germany contributed the most new funds, four and three respectively, followed by Poland (2), Russia (2), Peru (2) and Colombia (2). During the same period, the US had a net loss of 17 funds from the ranking, yet it still accounts for 124 funds in the research. The UK is the next highest with 26 funds, followed by Canada with 19, Japan with 17 and Australia with 15.

Hess says: “Despite healthy growth in 2012, these pension funds’ annualised growth rate for the past five years is just over three per cent, which is probably not enough to ensure they all meet their obligations absent capital injections. Indeed some most probably will not, particularly in what is predicted to be a low-growth, volatile and highly competitive marketplace for some time yet. The recent relative stability is very welcome and should be encouraging for investors – however they should not become too complacent given that the big issues, like the Eurozone crisis, the US fiscal cliff and appalling indebtedness, have not gone away.”

The research shows that assets held by Australian funds grew at the fastest rate during the five-year period to the end of 2012, 13 per cent in USD terms, followed by Taiwan funds at 11 per cent. During the same period the top Danish, Mexican and Brazilian funds grew at nine per cent, seven per cent and five per cent respectively, in USD terms.

Sovereign funds continue to feature strongly in the ranking with the 26 of them accounting for 28 per cent of assets and totalling around USD4.0trn. The 107 public sector funds in the research had assets of USD5.3trn in 2012 and account for 38 per cent of the total. Private sector industry funds (61) and corporate funds (106) account for 14 per cent and 20 per cent respectively of assets in the research.

Hess says: “While there is a diversity of pension systems around the world, each at varying stages of development, they all have in common the need to achieve future returns in a challenging investment environment. We believe that only those with the very best governance arrangements can take full advantage of their size and time frame to make the most of what is beginning to look like a sustained, if weak, growth path.”